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How To Save For College

Learn the risks of entering a college savings plan as well as the tax advantages, and read tips on choosing the best option for you. To compare specific college savings options refer to the links on the left.

The Risks and Rewards of College Savings options

College costs are rising and many are wondering how they are going to pay for a college education. Compared to saving for retirement, the college saving timeline is relatively short. At most it may be 18 years, and for many people it is a lot less. This can impact your ability to weather a market decline and increases your risk. Before investing in any college saving vehicle, carefully evaluate it and its investment options. Investment options with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your goals.

There are many events that could dramatically impact a college savings strategy. As a parent you must consider: What happens to your college savings if your child decides not to go to college, you have another child, or you lose your job? Most college savings options have various restrictions and limitations that may impact your ability to react to a changing situation, so carefully review any college savings option you are considering to make sure they have the flexibility and control you feel that you need.

Tips for Choosing College Savings Options

  1. Understand the Tax Benefits
    • A number of college savings options offer tax-advantaged ways to save. Taking advantage of these savings options may greatly affect how much you can accumulate for a college education.
    • In addition to the federal tax benefits of many college savings options, there may also be state tax benefits. Savings bonds are usually exempt from state and local taxes.
    • Many states allow you to deduct some or all of your contributions to a 529 plan if you're a resident of the state sponsoring the plan.
    • Some states may offer additional 529 plan tax advantages. Check out your own state's 529 plan before considering out-of-state plans.
    • Everyone's tax situation is different and state and federal tax law can be complex. You may want to consult with your tax advisor about which college savings options are best for you.
  2. Examine Fees and Expenses
    • All of the college savings options, involve various fees and expenses. A college saving option with higher costs must perform better than a low-cost option to generate the same returns for you. Even small differences in fees and expenses can translate into a large difference over time.
    • If you invest in mutual funds through an ESA or custodial account, you should check the fee table in the prospectus to see how the costs of a mutual fund add up over time. If you invest in stock, make sure you understand how much in commissions you must pay and factor this into any gain you may make.

For More Information

Read our pages on 529 Plans, Savings Bonds, Coverdell Education Savings Accounts, Custodial Accounts, and College Tax Credits for more information. If you have additional questions, refer to these resources below:

The Internal Revenue Service (IRS) - The IRS has information on the tax-advantage college savings options discussed here. Publication 970, Tax Benefits for Higher Education is a good place to start. It discusses 529 plans, ESAs, savings bonds, as well as tax credits and deductions for higher education expenses. You can find more information on their web site, www.irs.gov. Also, you can call the IRS toll-free at 800-829-3676 to order publications.

The National Association of State Treasurers' College Savings Plans Network - Visit www.collegesavings.org to read information on specific 529 plans. This site has links to each state's 529 plan, has information on state tax treatment, and other useful information. You also can call the College Savings Plans Network toll-free at 877-277-6496.